Take-Two Interactive (TTWO 0.78%), home to some of the world's most popular titles, has seen the gaming market it operates in grow in coordination with advancing technology and improvements in the quality of gameplay. The coronavirus pandemic added fuel to the fire as new and current gamers found themselves with more time to play games for lack of other things to do.
But just because the pandemic is easing doesn't mean the enthusiasm for video gaming is waning. Take-Two management expects the market to keep growing over the next several years, and it is investing to capitalize on that expansion.
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Take-Two Interactive is investing in growth
According to a 2021 report from IDG Consulting, global consumers spent an estimated $233 billion on video games in 2021. That figure is projected to grow to $286 billion by 2025 (at a compound adjusted growth rate of 5%). Fueling that growth are innovations improving gameplay. Next-generation gaming consoles, new graphic processing units for computers, and more powerful smartphones are making games more enjoyable and encouraging upgrades.
Take-Two Interactive is investing to capitalize on the growth through acquisition and new hires. From 2016 to 2021, Take-Two has increased its employee headcount from 2,187 to 5,046. The more than doubling of personnel will give it the capacity to boost the quality and quantity of games it offers. Already, the investment is bearing fruit. Sales have grown from $1.4 billion to $3.4 billion during the same five-year period.
In January, Take-Two Interactive announced it would be acquiring mobile gaming company Zynga in a cash and stock deal worth $12.7 billion. Probably best known for the popular title Farmville, Zynga has a more prominent presence in the free-to-play mobile gaming market, an area of weakness for Take-Two. The nearly $13 billion acquisition is expected to close early in its fiscal 2023 and will add to its capability to serve the growing gaming market. Additionally, it will help the company remain competitive as the industry consolidates.
What this could mean for investors
Shareholders can look forward to the returns from the growth investments. Take-Two's revenue growth over the last several years has resulted in expanding profit margins. From 2016 to 2021, Take-Two's operating profit margin increased from 4.3% to 18.7%. When a business delivers such powerful economies of scale, investors can cheer top-line growth.
While enthusiasm for the stock was high during the more acute phases of the lockdown, investors have been shying away from Take-Two in the past few months, even despite the January announcement it was acquiring Zynga. It looks as though investors were not thrilled about the premium price it paid for Zynga. Moreover, the market could be getting impatient with Take-Two and its extended game development cycles. It has been several years since it has launched a successful follow-up to its top franchise Grand Theft Auto.
Take-Two may have also been hurt because it was viewed as a pandemic stock. Whatever the primary cause, the stock price is down about 12% in the last year.
That said, the long-run prospects remain intact. The quality of gameplay will continue to improve, with no end in sight. That could bring new gamers to the market and increase the time and money spent by existing gamers. The short-run might be volatile as the world figures out what the new normal will be coming out of a pandemic, but in the long run, the gaming market is poised for growth, and Take-Two is positioning itself accordingly.
